The NAB business confidence index improved from minus 8.8 points to +2.9 points in December – the best result since July 2012. The business conditions index improved from minus 6.0 points to minus 4.3 points.
The survey of 500 businesses took place from 9-15 January and pre-dates the low inflation result and ongoing improvement in share markets.
What does it all mean?
There were encouraging signs in the latest business survey but really it is still early days and the improvements are yet to bloom into a fully-fledged recovery for the sector. Business confidence did bounce back into positive territory and recorded the most optimistic reading in five months but that’s as far as the good news goes.
Not only were business conditions still decidedly weak, but trading conditions actually deteriorated despite the substantial rate cuts late last year. Interestingly across the sub-indices, forward orders remained decisively weak, while more worryingly for businesses, profitability continues to be squeezed. Given the ongoing discounting and rising input prices it is understandable that margin pressures are resulting in businesses claiming that trading conditions are yet to improve.
The caution being shown by businesses can be clearly seen in the lack of interest in credit. Despite the attractive lower interest rates on offer businesses are still not interested in increasing borrowings. The substantial cuts in borrowing rates over the past few months have not altered perceptions on borrowing.
The proportion of firms reporting that they did not require credit rose from 50 per cent to 72 per cent in December. In other words, almost three quarters of all businesses are not interested in seeking loans. Structurally the domestic economy remains sound, however the patchy nature of the recovery is ensuring that businesses remain conservative and use existing cash facilities to fund development and investment.
Overall it is clear that businesses remain decidedly cautious about current economic conditions. However over coming months the Reserve Bank would be hoping that the deep rate cuts would boost confidence and support activity. And given that the latest survey was conducted in early January – before the release of the low inflation reading, the improvement in global economic conditions (extension of the US debt ceiling and stronger flash manufacturing readings across the globe) and rising sharemarkets, are likely to support further improvement in confidence levels in coming months.
What do the figures show?
The NAB business confidence index improved from minus 8.8 points to +2.9 points in December – the best result since July 2012. And the business conditions index improved from minus 6.0 points to minus 4.3 points.
The index of trading conditions deteriorated from minus 2.7 to minus 3.7 points; employment improved from minus 5.1 to minus 2.8 points; profitability improved from minus 11.1 to minus 6.3 points; and forward orders improved from minus 10.8 to minus 5.5 points but marked the 21st straight month that forward orders have contracted.
In terms of business conditions, NAB noted: “Business conditions in the non-farm business sector improved a touch in December – up 2 points to -4 index points – though remained relatively subdued overall. Despite the tick up in the month, trend business conditions were unchanged at -5 index points and remained consistent with an economy clearly growing below trend.
The tick up in activity in the month reflected modest improvements in profitability and employment conditions, which were partly offset by a slight deterioration in trading conditions. The December monthly survey highlighted the embedded weakness in the wholesale sector, which appears to be bearing the brunt of poor conditions faced by industries dependent on its services (including retail and manufacturing).
Elsewhere, conditions remained poor in manufacturing, retail and construction, while they were strongest in transport & utilities and recreation & personal services.”
Inflationary pressures remain well contained. The monthly reading of labour costs rose at a 0.9 per cent quarterly rate in December after a 0.7 per cent rise in November. Prices were flat in the December quarter after a 0.1 per cent rise in November. Retail prices rose at a 0.4 per cent quarterly rate in December after a 0.2 per cent decline in November.
Purchase costs rose at a 0.4 per cent quarterly rate in December after a 0.6 per cent rise in November. Capacity utilisation rose from 79.5 per cent in November to 79.7 per cent in December, still below the long-term average of 81.2 per cent.
The proportion of firms reporting that they did not require credit rose from 50 per cent to a record high of 72 per cent in December.
What is the importance of the economic data?
The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
What are the implications for interest rates and investors?
The Reserve Bank would be more relaxed about interest rate settings at present. The rate cuts last year continue to work through the economy and while policymakers may consider cutting rates further, a move is unlikely to take place at the next Board meeting in February, given the improving economic outlook.
